Monday, January 21, 2013

Minor League Clawbacks

Recently, I had the good fortune of having an article published by the Saint Louis University Law Journal. The article, entitled "Deterring Opportunism Through Clawbacks: Lessons for Executive Compensation from Minor League Baseball," compares the clawbacks found in standard MiLB contracts with clawbacks in executive compensation contracts.

So, what the heck is a clawback? Well, it's basically some verbiage in a contract that allows for money already given to a person to be taken back--or "clawed" back--if a certain event occurs.

What the heck do clawbacks have to do with minor league baseball? As the article details on page 200 (no, the article isn't 200 pages--it begins on page 185 of the issue and goes for 30 pages), the Commissioner's office introduced "recommended" clawback language for minor league contracts in 2006. By 2007, almost all teams had adopted the language.

The language involved signing bonuses. MLB teams had been burned in recent years by a few draftees who had taken large signing bonuses and simply walked away from the game after a year or two in the minors. For instance, Ryan Jaroncyk signed with the Mets in 1995 for $850,000, played two years in the minors, and retired from the game at the age of twenty. The Mets never recovered a dime of the bonus.

The article details other examples: Grant Desme, who retired to become a priest; Justin Hoyman, who pocketed a $725,000 before retiring after two years in the minors; Quan Cosby, who left the minors to play football; and Tom Wilhelmsen, who retired from the game after "a lot of beer and grass."

Most of the clawback provisions adopted by teams were identical. If a player retired prior to the expiration of his standard seven-year contract, the provision allowed the team to claw back a portion of the signing bonus. They mostly followed the same basic formula: if a player retired after a single season, the team could demand the return of 6/7 of the signing bonus; if a player retired after two seasons, the team could the return of 5/7 of the signing bonus; and so on until the end of the contract.

I argue in my article that the clawbacks effectively deter opportunistic behavior. As the above examples demonstrate, occasionally players desire to leave their contracts very early in their careers. Jaroncyk provides an example of a player who probably never even intended to put forth a good faith effort to make it to the majors. Others intend to put forth such an effort, but minor league baseball can take a toll on a young athlete. Long bus rides, the absence of your family, the inevitable struggles and failures, and the exhaustion of playing every day can make one desire to run back home to your high school girlfriend and be a rodeo clown.

The clawback provisions prevent players such as Jaroncyk from gaming the system. And they prevent other homesick players from leaving the game prior to giving it full consideration, which might ultimately help both the team and the player. Thus, they are an effective tool from a contractual standpoint.

Now, this is a blog that advocates for the rights of minor league players. And one important thing about clawbacks needs to be brought to attention here: the mechanism in which these provisions were adopted was unfair.

MLB teams unilaterally included these provisions in their standard minor league contracts. While a few of the top players drafted each year may in fact have the leverage to negotiate such provisions out of their contracts, most minor leaguers do not possess such leverage. After all, the Rule 4 draft exists in order to reduce players' leverage. Players can only negotiate with a single team, and they only have one or two opportunities to do so. For those drafted after the first few rounds, the contract nearly becomes a take-it-or-leave-it instrument, such is the state of their relative bargaining power.

Thus, the unilateral inclusion of the terms was unfair, even if the provisions are both legal and useful from a contractual standpoint. This again highlights the need for a minor league union. Such a union could effectively re-balance the relative bargaining power between owners and minor leaguers. Instead of unilateral implementation, the terms of such clawback provisions could be discussed between both parties to ensure that their inclusion does not become too draconian for the player.

In the last round of bargaining, the MLBPA brought up the length of the clawback provisions. After discussions, MLB and the MLBPA agreed that clawback provisions may continue to be included in minor league contracts, but the length of the provisions must vary according to the signing bonus. For instance, longer clawback provisions may be included for bonuses above $1,000,000 than for smaller signing bonuses. In fact, for signing bonuses under $250,000, the clawback may only extend through the first three years of the standard seven-year contract.

This makes sense. The larger bonuses should be the chief concern of the teams. Teams shouldn't be in the business of forcing a fifth-year senior college signee into staying until the end of his contract just because he doesn't want to pay back a portion of the $2500 signing bonus that he no longer has.

In the end, then, this is a double lesson. It's a lesson in how, without a union representing them, owners can do just about whatever the heck they want with minor league contracts. And it's also a lesson in how a union can effectively re-balance the mismatched bargaining power and ensure that players are properly represented. Once this occurs, both sides often benefit.

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